Traders trim bets on October Fed easing

Investors pared expectations for future Federal Reserve rate cuts this year after the September jobs report showed the U.S. unemployment rate dropped to a 50-year low.

Fed funds futures shows there’s around 17.5 basis points of easing priced in for the central bank’s Oct. 31 meeting. November fed funds futures imply a rate of 1.655 per cent at the end of 2019, having indicated 1.645 per cent just before the release of the data. That’s based on an effective fed funds rate at 1.83 per cent as of Oct. 3.

While the U.S. added fewer jobs than anticipated last month, the market was bracing for a larger drop after disappointing data, according to TD Securities. Additionally, significant upward revisions to August report and the fall in the unemployment rate is “encouraging,” said Gennadiy Goldberg, the firm’s senior U.S. rates strategist.

“It’s a bit of relief for the market following a string of weaker-than-expected data earlier in the week,” Goldberg said. “The market was set up for a lower headline number overall.”

Short-dated Treasuries underperformed, with 2-year yields little changed at 1.39 per cent after hitting a 2-year low Thursday. The Bloomberg Dollar Spot Index traded 0.2 per cent lower, halving daily losses after the release.

The jobless rate unexpectedly dropped to 3.5 per cent from 3.7 per cent, the lowest since December 1969. While the U.S. added a below-forecast 145,000 jobs in September, August’s figures were revised to 168,000 from 130,000.

Fed Chairman Jerome Powell highlighted the labour market’s strength at an event in Washington on Friday, saying that the U.S. economy is in a “good place.”

“It may not be as weak as needed to confirm an October rate cut, but it leaves the door open for it,” said Kathy Jones, chief fixed income strategist at Charles Schwab.